Target sees signs of progress, but cuts outlook for year

Glen Stubbe, DML - Star Tribune Star TribuneAnalysts tried to pin down Brian Cornell, Target's new CEO, on his vision for the company during Wednesday's conference call to for second-quarter earnings. Cornell, pictured at its downtown store last week, said he's still learning about the company.

Executives sounded upbeat about a strong start to the back-to-school shopping season Wednesday as they discussed the retailer’s latest quarterly results. And yet, they also lowered their profit outlook for the rest of the year.

The seemingly conflicting statements showed that, even as Target tries to create a turning point with the arrival of new chief executive Brian Cornell, its performance is still being shaped by fierce competition and economic issues outside its control.

Consumers are still conservative with their spending and retailers continue to respond by dangling discounts.

“The retail landscape is very promotional,” John Mulligan, Target’s chief financial officer and its interim leader in the May-through-July quarter, said after the results were announced.

He added that Target has been pulling back on some of its big discounts from earlier the year, which were initially aimed at winning customers back after the data breach last holiday season caused some people to avoid from its stores.

David Paul Morris &#x2022; Bloomberg

Target lowered its profit outlook for the year, as consumers continue to be conservative on spending, and retailers must use promotions to lure them in.

But the company still ended up being more promotional than it had planned in the second quarter, bowing to competitive pressures. Last week, rival Wal-Mart Stores Inc. lowered its outlook, citing the same issues. Target now expects adjusted earnings per share of $3.10 to $3.30, down from its prior guidance of $3.60 to $3.90. In 2013, its full-year adjusted profit amounted to $4.38 per share.

Some analysts also suggested Target was trying to adjust expectations for investors as Cornell settles in to the job.

“You see this sometimes when new CEOs come in: companies lower the bar,” said Brian Yarbrough, an analyst with Edward Jones. “It gives them a better opportunity to beat numbers and to gain Wall Street’s confidence.”

Cornell, a former PepsiCo and Sam’s Club executive who just started at the firm last week, made some introductory remarks to analysts during the earnings call. Responding to questions, he shied away from giving specific details about his plans for the company. “I want to be a good student of the business, but clearly, we have to have a sense of urgency here,” Cornell said.

He told the Star Tribune last week that he doesn’t plan to make any immediate changes, but will be able to share more of his vision and plans for the company in early 2015.

David Strasser, an analyst with Janney Capital Markets, sounded an optimistic note that Target — just as Best Buy and Home Depot have done — can recover with the help of the good leadership.

“It seems that if nothing else, in his short time [as] CEO, Brian Cornell has brought back some confidence and reignited passion in a management team that has been hit pretty hard by a variety of factors, many of which were out of its control,” Strasser wrote in a research note.

Target’s stock rose 1.8 percent on Wednesday. The results were in line with the performance warning Target gave on Aug. 5.

The company’s profits sank 62 percent to $234 million for the three months ended Aug. 2, down from $611 million a year ago. Same-store sales in the U.S. were flat after dropping in three of the previous five quarters.

“The results and guidance confirm that there are no easy fixes for the many challenges that Target faces,” Faye Landes, an analyst with Cowen and Co., wrote in a research note.

Target said that same-store sales in the U.S. were up more than 1 percent in July and back-to-school sales in August were showing even better results.

Digital sales rose 30 percent in the quarter, driven in part by its nearly one-year-old service to buy online and pick up in store, which now accounts for about 14 percent of its digital sales.

Store traffic, which plunged more than 5 percent in the fourth quarter when the data breach was first disclosed, has been showing gains since. Traffic dropped about 2.3 percent in the first quarter and was down just 1.3 in the second quarter.

“We’re continuing to heal the business,” Mulligan said.

Meanwhile in Canada, Target logged a $204 million loss in the quarter as it has continued to take a hit on margins by clearing out excess inventory. Last week, the retailer unveiled a comprehensive plan to revive its struggling division Up North, including moves aimed at fixing its well-known stocking issues and perceptions that its prices are too high. It is also overhauling its merchandise assortment in Canadian stores.

On Wednesday, analysts were pleased to hear company executives spend a lot of time talking about new merchandise initiatives aimed at restoring Target’s “cheap-chic” reputation that had been such an integral part of its previous success.

Its next designer partnership — Altuzarra for Target, a limited-edition women’s line — will hit stores and the website on September 14. Also next month, Target will expand its Sam & Libby partnership beyond just shoes to a line of handbags. It will also be adding more items to its relatively new Made to Matter organic and natural product line.

On top of that, Target continues to roll out remodeled store presentations, including a revamped apparel department with mannequins that are going into another 600 stores by October.